SWOT Analysis in the software industry Essay

I. Introduction

In the past twenty to thirty years many changes and developments have taken place in the software industry which started off during the 60s mainly in the United States of America and experienced a revolutionary boom since the 1980s (Steinmueller, 1995). There are many different ways and methods of developing software and planning the strategy of a software development company and as it is shown in many recent research projects. Most of these projects are usually concerned with the way that software is developed and not the way that the strategy of the company as a whole is planned (Cusumano, MacCormack, Kemerer, & Crandall, 2003). Another important factor is which techniques and methods are used to analyze company’s environment and how the strategy is formulated and implemented.

In this paper we will try to analyze in detail a very popular method for strategic planning which has been mostly used for product portfolio planning and/or strategic planning on an abstract level (Houben, Lenie, & Vanhoof, 1999). We will focus our interest in the software industry and base our research on the case study of the Austrian software industry as it is presented in (Bernroider, 2002).

Additionally, we will try to present certain guidelines, in order to carry out a successful SWOT Analysis for any software development company. This is the method of SWOT Analysis, which was developed from Albert Humphrey during the 1960s, as part of a research project for Stanford University. In the following sections we will try to elaborate on SWOT analysis in Section II, show an example for a software development company in Section III and finally present the background of the method and related literature in Section

IV.

II. SWOT Analysis: method description

The initials SWOT stand for Strengths, Weaknesses, Opportunities and Threats. These are the basic elements SWOT analysis which is usually presented as a matrix with four main blocks; one for each element of the SWOT analysis.

Figure 1: A basic SWOT Analysis matrix

As it is quite visible in Figure 1 we also have some other categorizations within matrix of SWOT Analysis; elements concerning the organization itself which are called Internal (Strengths and Weaknesses ), elements which are about the company and its relationship with its environment, named External (Opportunities and Threats), elements which are Helpful for the organization (Strengths and Opportunities) and elements which are Harmful for the organization (Weaknesses and Threats).

First of all we have to define the four main building blocks of our diagram; Strengths: The strengths of an organization are the core competencies of the company, the key factors which enable it to excel in certain aspects and gain all kinds of profit, whether that is purely economical, organizational or other. Weaknesses: As weaknesses we define the flaws that an organization has, something which means that these weaknesses might lead to serious problems in the company’s strategic planning and might even lead to worse situations, such as becoming a serious threat for the organization’s existence. Opportunities: These are certain steps which will help a company to perform better, generate more profits etc. The opportunities can be of many different perspectives, such as entering a new market, or in creating a new business unit and etc.

Threats: As threats we name the potential reasons which might harm a company, such as a new entrant in the main market of operation, a big economical recession and other reasons which might threaten the current position of an organization. Having defined the main blocks of the SWOT analysis matrix, we can continue and try to dig deeper into these elements and try to link them with certain aspects of an organization. The two main aspects of this effort were already mentioned above and two most important ones are the Internal and the External aspect of an organization. As it is mentioned in Chapter 2 of (Ward & Peppard, 2008), an important step in formulating a business strategy is the so called ‘Situation Analysis’, which if put into words answers to the question “Where are we now ?”.

This is where the Internal and External analysis of an organization really come into play and help managers realize the different dimensions of their business Internal analysis: The internal part of an organization can vary, depending on the size, but the main principles on which we focus our interest remain the same and according to (Bernroider, 2002) these are the following; Resources, meaning the available resources which are enabling the company to develop and deliver the software which it sets out to provide to its customers. Capabilities, that is the critical success factors which the company possesses and that give it a competitive advantage. Quality, which is quite clear as a term, referring to the quality of the products / services provided by the company and to the quality of the internal organization of the company, such as the quality of the business processes.

Efficiency, meaning how efficient the company is having a solid structure where all different departments, units and processes are properly organized and communicate well, in order to have a smooth operation of the company. Customer responsiveness, which is not only referring to the obvious, that is how many customers does a company have, but also to how extensive is the diversification of a company’s products, what different price levels exist and how satisfied are those customers. Innovation, which is about the level of a company’s desire to invest in new technologies, follow technological breakthroughs, keep up with the emerging business trends and in which extend is part of the profits re-invest in research & development.

External analysis: The external analysis of an enterprise is a task which is a bit more complicated (see Background and related literature), but it mainly is an analysis of the current competition and of the market in which the company operates. In order to give an example of external analysis factors we will mention some external barriers and drivers as they are mentioned in (Bernroider, 2002): Marketing / distribution in foreign countries

Culture, which refers to certain restrictions or difficulties in communication that might arise due to different languages and other cultural aspects. Trade / commerce law issues, which are sometimes different from country to country and might cause problems when trying to enter new markets. EU regulations that might be rather complicated and restrictive in the standards of quality that must be followed in order to market a software product in the EU Market size

III. SWOT Analysis: example

Since we have explained the SWOT analysis principles, how it should be carried out and how it is linked to the environment of a company, it is time to actually describe an example for this method. For our example we will try to carry out a SWOT Analysis of Microsoft, a famous and international company which creates software (such as the Microsoft Windows Vista operating system and others) and other kinds of technology equipment and gadgets. Step 1.

First of all we need to define the mission of Microsoft:
As it is mentioned in Microsoft’s website the company’s mission is defined as follows “At Microsoft, our mission and values are to help people and businesses through the world realize their full potential” Source: http://www.microsoft.com/about/default.mspx#values

Step 2. and Step 3.

Figure 2: SWOT Analysis for Microsoft (see Appendix for larger version) In the next two steps (4&5) certain decisions have to be taken and implemented, about the strategy of Microsoft, for example whether more money will be invested in the ‘Online office’ emerging market or will Microsoft just try to fight Google, since it seems that is the main competitor.

IV. Background and related literature

In order to gain some more insight in the creation of the SWOT Analysis method, it would be useful to know some more details about its origin; this is where we come to a paradox, since very little is actually known on how the method was developed. There actually are no papers that first present the method, since it was created during a research project funded by a large number of companies making it rather confidential. As it is mentioned in an article of www.businessball.com about SWOT Analysis and its origin, “SWOT analysis came from the research conducted at Stanford Research Institute from 1960-1970. The background to SWOT stemmed from the need to find out why corporate planning failed. The research was funded by the fortune 500 companies to find out what could be done about this failure.

The Research Team were Marion Dosher, Dr Otis Benepe, Albert Humphrey, Robert Stewart, Birger Lie.” As it is quite easy to understand, SWOT Analysis can be used in many different areas of management, since it is a method which gives managers the opportunity to analyze a certain problem and put to paper the pros and cons of a situation, a company etc. Thus it helps them to begin their research in the certain problem and provides the basic concepts in order to decide what the next move will be. For example it is also used for Marketing management, in order to define whether it is profitable to enter new markets of create new products etc. (Wilson & Gilligan, 2005). Another interesting quote from this article would be the following; “A SWOT analysis measures a business unit, a proposition or idea; a PEST analysis measures a market.”

This brings us back to the external aspect of the SWOT Analysis method is the way that the External environment is perceived by a company and how it is analyzed. Being more specific, software companies have to pay really close attention to their external environment, since competition and market status play a huge role in the success of a software company. As mentioned in (Bernroider, 2002), many companies tend to use another, complementary, method in order to analyze their external environment and in continuum to define certain ‘Opportunities’ and ‘Threats’. The two most commonly used method are PEST and the 5 Forces model by Porter (Porter, 1998) , (Grundy, 2006). PEST stands for Political, Economical, Social and Technological and it revolves around these dimensions of the external environment of an organization, in order to define potential threats and/or opportunities.

The 5 forces model by Porter is a rather known model, which consists of the five main elements of a company’s environment; (Existing) Competitors, (Bargaining power of) Suppliers, (Bargaining power of) Buyers, (Threat of possible) Substitutes and (Threat of possible) New Entrants. To sum up, SWOT Analysis is a very useful tool for decision making and for organizing ones thinking about a certain situation or idea, whether that is a company’s current situation, a certain problem within a company’s process etc. It should be combined with other analyzing techniques, in order to achieve a high level of analysis of a company, so as to succeed and make the most rewarding and efficient choices, since the final result of SWOT Analysis is to formulate a general plan for a new strategy and ways to implement it.